4 Short Squeeze Earnings Trades

by Jamie Dlugosch | November 7, 2011 1:33 pm

After a huge rally in stocks in October has come a volatile and slightly down November, and right now, plenty of investors are betting against the market and the economy. Specific names like Green Mountain Coffee Roasters (NASDAQ:GMCR[1]), Netflix (NASDAQ:NFLX[2]) and Research In Motion (NASDAQ:RIMM[3]) have been under attack from short sellers for some time.

We clearly are at a tipping point with both the market and the economy. Too much debt and high unemployment are taking their toll on consumers. Though spending has held up relatively well, it is reasonable to assume that it will not at some point in the future.

On the flip side, corporate profits have been strong and growing at a double-digit pace this year. Does it really make sense for stocks to be flat over the past 10 months of trading? It does if the future is bleak. Essentially what we are seeing is a collapse in the price-to-earnings ratio of the market given the uncertainty of future profit growth.

Remove that uncertainty, and we can see what stocks are capable of doing. Moves to the upside can be explosive. The best places to find those herculean moves are stocks that have plenty of doubters — in the form of short sellers.

Here are four stocks that could see a short squeeze when they report earnings this week:

Take-Two Interactive

Video game titan Take-Two Interactive (NASDAQ:TTWO[4]) releases earnings after the bell Tuesday. Short sellers are not optimistic about the numbers, but those selling TTWO stock have been big losers since the end of August. Take-Two shares are up 45%, recovering most of the value lost during the July market plunge.

Despite the gains, Take-Two still has plenty of nonbelievers. As of Oct. 14, 13.9% of shares outstanding were being sold short. That is a hefty number and could provide fuel to the bull move for TTWO if it provides a strong earnings report.

In the last quarter, Take-Two missed expectations by seven cents per share. For the quarter ending Sept. 30, Wall Street is looking for the company to lose 57 cents per share. Ninety days ago, the expectation was for a loss of only five cents per share. The drastic change shows sentiment might be too negative.

So far, revenue numbers in the video game industry are growing nicely[5]. Take-Two might lose money in the period, but it won’t be as bad as the shorts expect.

SodaStream

SodaStream (NASDAQ:SODA[6]) is poised for rapid growth. SodaStream, capitalizing on the beverage market, allows consumers to make beverages from the comfort of their own home, and its model is actually somewhat similar to Green Mountain.

That said, SodaStream still is in the very early stages of its development. The company has yet to reach the tipping point with the market in the same way Green Mountain has. Of course, that has not stopped bullish momentum investors from bidding up shares. Prior to late July, SodaStream was up nearly 150% since last November.

Those gains were a bit premature. In the last earnings report, SodaStream beat Wall Street expectations but kept guidance level. That, combined with a bearish market, was enough to send investors fleeing to the exits. Today, SODA stock trades for just about where it was priced one year ago.

As of Oct. 14, 6.5 million shares were held short out of a total 13.5 million shares outstanding. That is a huge — and undeserved — short interest. With SodaStream selling products at Bed, Bath & Beyond (NASDAQ:BBBY[7]) and rollouts expected at behemoth retailers Wal-Mart (NYSE:WMT[8]) and Target (NYSE:TGT[9]), sales are likely to explode.

For now, Wall Street is looking for the company to make $1.06 in the current year, growing 25% to $1.33 in 2012. At current prices, SodaStream trades for 33 times current-year estimated earnings. If the company gets more optimistic with its forecast when it releases earnings before the bell Wednesday, watch out!

Green Mountain Coffee Roasters

Long-time short sellers of Green Mountain have completely missed the boat on this explosive growth story. The single-serving coffee sensation has been a huge success. Before the stock collapsed in October, shares were up a whopping 214% over the past 12 months, making it easily one of the best performing stocks in the market.

The shorts have been undeterred. The most recent attack of the company gained steam in October. The shorts suggested accounting irregularities[10], spooking the market. GMCR lost nearly half its value in October, falling to a low of just more than $60 per share. The stock has recovered some in November, and more gains could occur with a strong earnings report after the bell Wednesday.

As of Oct. 14, 16% of GMCR shares were outstanding in the hands of short sellers. To the extent Green Mountain addresses the accounting question, the shorts likely will cover and cover quickly. Wall Street is looking for the company to make $1.65 for the fiscal year also ending Sept. 30. Profits are expected to grow by 59% in fiscal year 2012 to $2.62. At current prices, GMCR shares trade for 42 times current-year estimated earnings.

It is easy for short sellers to attack accounting issues for a fast-growing company like GMCR, but let the story develop before buying in. This could be one great short squeeze opportunity.

Nvidia

Technology firms have had a tough go of it in 2011. Since the early spring, shares of graphic chip maker Nvidia (NASDAQ:NVDA[11]) have fallen by 44%. The selling goes beyond the fears of a financial crisis in Europe. The issue is about supply and demand. Short sellers see the global economy faltering, negatively impacting sales of computing devices and smartphones.

The selling comes in the face of strong operating performance. Nvidia has met or exceeded Wall Street estimates of profits in each of the past four quarters. The company reports results after the bell Thursday. Analysts are looking for a profit of 26 cents per share.

The operating performance has not deterred short sellers. As of Oct. 14, short interest was 7% of shares outstanding. Look for those shorts to start covering with another strong earnings report. For the full year ending Jan. 31, 2012, Nvidia is expected to make 99 cents per share, improving by 15% in the following year to $1.14. At current prices, shares trade for 15 times current-fiscal-year estimated earnings.

Tablet computing and handheld devices have plenty of growth in my opinion irrespective of global economic conditions. I expect the company to report a strong number on Thursday that will result in short sellers covering.

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.